How Ethereum Smart Contracts Could Revolutionize the Financial Securities Industry

The Polymath security token protocol embeds regulatory requirements into tradable tokens. This new standard for blockchain-based security tokens is ushering in a new era of “Security Token Offerings” or “STOs”.

We thought we would illustrate some of the underlying technology behind the security token revolution powered by Polymath.

Smart Contracts

Computer scientist Nick Szabo publicly conceptualized the smart contract in the early nineties and smart contracts have been a central topic in blockchain since Bitcoin’s inception. In fact, the Bitcoin protocol actually facilitates a simplified version of “smart contracts” that enables pseudonymous peer-to-peer transactions.

In 2012, Bitcoin core developer Michael Hearn notably discussed smart contract concepts, highlighting “smart property” and other ways in which new means of ownership could be facilitated by the blockchain.

In the Ethereum white paper, smart contracts are described as “cryptographic ‘boxes’ that contain value and only unlock if certain conditions are met.”

Smart contracts on the Ethereum blockchain are more powerful and easy to implement than Bitcoin’s smart contracts due to the former’s integration of Turing-completeness.

Ethereum offers developers a more flexible scripting language than Bitcoin, allowing developers to write their own programs on top of the platform easily.

As seen in the ICO craze of the past year, fundraising and token creation has been the most popular application of “smart contract” technology.

But, what else can smart contracts achieve?

• “Multi-signature” accounts
• Manage agreements between users
• Provide utility and reference to other contracts
• Store domain registration information, membership records, and more.

But wait! There’s more…

Property can now be automatically traded and loaned thanks to the smart contracts. With smart contracts and blockchain technology, digital items can remain unique and unable to be duplicated while still being tradable.

We can now have peer-to-peer bond and stock trading thanks to smart contracts, which could enable blockchain applications to even support the entirety of the global financial system.

Enter “Security Tokens”

As you may know, smart contracts have fueled the mega-trend of ICOs over the past two years. Hundreds of organizations raised more than $1.2 billion in 2017, as well as more than $4 billion USD since the first ICO in 2013, Mastercoin (today known as “OMNI”).

Two types of tokens are sold in an ICO–utility tokens and security tokens. Utility tokens grant access to software, products or services based on smart contract technology, and are several orders of magnitude more common than security tokens.

Security tokens can be an equity stake in an organization or a claim to wealth generated by that organization. Any type of financial security can be a security token. Security tokens, just like securities, are subject to securities regulations, which represents a barrier to successful crypto-financing–especially for smaller companies.

That’s why Polymath is using smart contract technology to simplify the entire process of creating a security token.

This is made possible by an entirely new token standard: ST20.

Polymath “ST20 standard” security tokens are able to store a list of authorized investors and their Ethereum wallet addresses. This means that only investors who have had their identity and accreditation status validated by an issuer’s specified KYC provider may purchase and hold ST20 standard tokens. Polymath security tokens are programmed to verify who can hold a token by restricting trades to any address that has not passed the required verifications. Issuers can now rest assured their tokens are only held by authorized investors.

“Security Token Offerings” are each comprised of their own smart contract. This helps to ensure all security tokens related to that contract can be traded in accordance with the necessary compliance processes.

Polymath gives issuers of financial products access to the blockchain, smart contracts and token creation technology, in the process disrupting the legacy securities industry.

Let the stampede begin.

About Polymath

Polymath Network (Polymath) is a decentralized platform that makes it easy to create security tokens. The Polymath ST-20 standard embeds regulatory requirements into the tokens themselves, restricting trading to verified participants only. The platform simplifies the complex technical challenges of creating a security token and aims to bring the multi-trillion dollar financial securities market to the blockchain.